8#2

Members of the board of directors of

Adobe Security

have received the following operating income data for the year just ended:

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(Click the icon to view the operating income data.)

Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should discontinue the line.

.....

Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by

$85,000

and decrease fixed marketing and administrative expenses by

$9,000.

Read the requirements

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.

Requirement 1. Prepare an incremental analysis to show whether

Adobe Security

should discontinue the industrial systems product line.

Incremental Analysis for Discontinuation Decision

Total

Contribution margin lost if Industrial Systems is discontinued

Less: Fixed cost savings if Industrial Systems is discontinued

Operating income

lost

if Industrial Systems is discontinued

Requirement 2. Prepare contribution margin income statements to show

Adobe Security's

total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives' income numbers to your answer to Requirement 1. What have you learned from this comparison?

Begin by preparing the statements with and without the industrial systems line, then prepare the contribution margin income statement showing the decrease if the industrial systems line is discontinued. (Use parentheses or a minus sign for an operating loss.)

Adobe Security
Total Analysis of Discontinuing a Product Line
	Totals With	Totals Without
	Industrial Systems	Industrial Systems
Sales revenue
Variable expenses:
Cost of goods sold
Marketing and administrative expense
Total variable expenses
Contribution margin
Fixed expenses:
Cost of goods sold
Marketing and administrative expense
Total fixed expenses
Operating income (loss)

Difference

What have you learned from this comparison?

The operating income difference calculated on the total analysis of discontinuing a product line

does not equal

equals

the expected decrease in operating income if

Adobe Security

discontinues the industrial systems product line, as shown in Requirement

1.

This demonstrates that the incremental analysis approach in Requirement 1 yields

different

the same

results as the longer approach in Requirement 2 that compares total operating income under the two alternatives.

Data table

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	A	B	C	D
1	Adobe Security
2	Product Line Contribution Margin Income Statement
3	For the Year
4		Product lines
6		Industrial Systems	Household Systems	Company Total
7	Sales revenue	$340,000	$390,000	$730,000
8	Less cost of goods sold:
9	Variable	35,000	46,000	81,000
10	Fixed	260,000	67,000	327,000
11	Gross profit	$45,000	$277,000	$322,000
12	Less marketing and administrative expenses:
13	Variable	63,000	68,000	131,000
14	Fixed	44,000	25,000	69,000
15	Operating income (loss)	$(62,000)	$184,000	$122,000